Lisa Keister studies ways to diminish the wealth gap in America.     By Kevin Fitzsimons

Investments play major role in racial wealth gap

The wide gap in wealth ownership between black and white Americans could be narrowed substantially if African Americans invested more in stocks and mutual funds, new research suggests.

An Ohio State sociologist found that African Americans are much less likely than whites to buy high-risk, high-return assets such as stocks. But the results suggested that if blacks bought high-risk assets at the same rate as whites, the wealth gap would decline dramatically.

"Much of the existing wealth disparities could be alleviated by policies that encourage blacks to own high-risk assets such as stocks that are likely to increase their net worth," said Lisa Keister, author of the study and assistant professor of sociology.

"Making high-risk asset ownership accessible and understandable to black families would not end wealth inequality, but it would clearly reduce the current dramatic disparities."

The study was published in the December 2000 issue of the journal Social Science Research.

How big is the wealth gap between black and white Americans? One study found that in 1992, the median net worth of African Americans was only 8 percent of the median net worth for whites. Savings strategies may be one reason.

Keister used the Federal Reserve Board's Survey of Consumer Finances (SCF) to demonstrate that white families are considerably more likely than black families to own stocks and other relatively high-risk investments. The 1998 Survey of Consumer Finances found that about 22 percent of white families and about 9 percent of nonwhite families own stocks. About 18 percent of white families and about 8 percent of nonwhite families own mutual funds.

"Savings that are kept in relatively risky investments such as stocks and mutual funds naturally accumulate faster, particularly during times of prosperity," Keister said. "The fact that blacks are not making these types of investments means they are not going to be building wealth as quickly."

As part of her study, Keister used a simulation model to explore what would have happened if African Americans had invested in high-risk assets such as stocks at the same rate as whites between 1960 and 1995.

She began with a 180,000 person sample drawn from the 1960 U.S. Census and then used data from various other sources, such as the SCF, to make her calculations. The model assumes that nothing else changes -- income for African Americans remains the same, for example -- but that African Americans were as likely as whites to invest in high-risk assets.

Keister's model showed that the percentage of blacks among the super-rich -- those in the top 1 percent of wealth Ñ would have been considerably greater if blacks had invested in ways more similar to how whites invest. In reality, there were no blacks among the top 1 percent in wealth in 1995. However, in Keister's model, 5 percent of the super-rich would have been African Americans in 1995 if blacks had invested in high-risk assets at the same rate as whites since 1960.

Keister's simulation experiment also suggested that changes in black investment behavior may be able to reduce overall wealth inequality. In 1995, the wealthiest 1 percent of Americans owned 39 percent of household wealth in the United States. In Keister's simulation, if blacks had invested in high-risk assets at the same rate as whites, the top 1 percent would own 31 percent of the country's total wealth, a decline of 8 percent.

Keister did point out that even "after completely removing the direct effects of race on asset ownership, the vast majority of wealth holders were white and that wealth inequality was extreme. Of course, changes such as these take time, and because wealth ownership tends to persist across generations, dramatic changes would be rare."

But, she said, the study showed that changes in savings strategy among blacks could have a measurable impact on wealth accumulation by African Americans, as well as on total wealth inequality.

In addition, she noted that there are many factors that her model did not change -- such as income -- that play important roles in wealth accumulation. "The bottom line is that asset ownership does have an important and dramatic effect on racial differences in wealth ownership," she said. "However, wealth disparity will continue until black and white families become more equal in a variety of areas, asset ownership included."

Education is an example of the other factors that affect wealth. After Keister's original simulation experiment, 5 percent of the super-rich in 1995 were black. When she also reduced the differences in education between blacks and whites -- in other words, when she assumed more blacks had completed higher levels of education -- the percentage of blacks among the super-rich increased by 1995 to 8 percent of the total.

The results do not suggest that the wealth gap between black and white Americans could be eliminated simply by having blacks invest in the stock market, Keister emphasized. "Clearly, racial differences in wealth ownership are influenced by many forces, but these results indicate that decisions about how families save are important," she said.

"If we provided opportunities and incentives to low-income, low-wealth households to save and to invest in more long-term, sound financial instruments, we could go a long way toward reducing wealth inequality."

The Office of University Relations produces articles about faculty research to distribute to the national media. Among the most recent stories:

Consumers save 5-12 percent by switching gas companies

Residential consumers have benefited from competition in the natural gas market, but not significantly, according to a report by Ohio State's National Regulatory Research Institute. Consumers who switch natural gas suppliers as the result of deregulation save an average of 5 percent to 12 percent on their gas bills, the study found.

While any savings are welcome this winter, many experts had hoped consumers would be saving even more, said Kenneth Costello, a senior economist at NRRI and co-author of the report. "Residential customers have not experienced the same savings as did industrial customers when that market was deregulated," Costello said. "In those cases, prices dropped by at least 10 percent and sometimes significantly more."

However, he said small profit margins in the gas industry today mean companies can't offer big savings to residential customers.

The results showed consumers saved money in 15 of the 18 programs studied, Costello said. In three programs, the average price was actually slightly higher than it would have been under the original gas utility, but those findings may be the result of limitations in the data available, Costello said.